Eurobonds - Nationalism Meets Federalism

I quote from the Wall Street Journal, “Germany opposes the issuance of jointly backed European bonds, arguing that they would allow inefficient, highly indebted economies to gain a free ride on the stability and favorable financial conditions secured by the more-disciplined countries. German officials have said that such bonds can be an option only once all euro-zone member states have improved the health of their finances and boosted their competitiveness.” This is the standard line that Germany has been using for some time now; allow me to translate this for you…”We don’t want to pay.” It is as simple as that so you can ignore the rest of the rhetoric.

France at the next EU summit is going to push for Eurobonds and Germany will resist in what may be a quite unpleasant stand-off. From Germany’s perspective I can easily understand their feelings about this matter because the consequences of Eurobonds are very negative for them. Germany is responsible for about 27% of the obligations at the EU and almost 20% of the liabilities of the ECB. Eurobonds are quite clearly a “transfer union” where Germany is the primary source of funding then for the rest of Europe and there are very significant consequences if this plan is pushed through.

Over a period of time, if enacted and used as the primary funding source for the European Union, Eurobonds will average the cost of funding for the entire construct so that Germany, the Netherlands, Finland et al. will pay a much higher cost for funding while the periphery countries lower their costs of financing. It will not just be funding that is averaged however and this is where the consequences become acute. The ratings of all of the countries in Europe will also get averaged so that you will eventually have an “A” rating for Europe and for the Eurozone institutions such as the European Investment Bank. Also you will average the standard of living for Europe so that the German economy will decline to the median while Portugal, Spain and Italy et al rise to the average. If Eurobonds are ever enacted I would suggest selling any/all of the “AAA” countries and buying the periphery ones as the correct play in the intermediate term. In fact, Eurobonds are the crux where Federalism comes head to head with Nationalism and where the rhetoric gives way to actualization. I would also surmise that if, somehow, Germany would agree to this scheme that Ms. Merkel will be forced from the Chancellery and in short order so that she is very quickly going to be stuck in between the rock and the hard place where what she says is going to have to measure up to what she is going to do and all of the excuses that we may get in the Press will not erase the liabilities that she is about to face.

A few other pertinent issues to consider along with Eurobonds:

How do you know that when you wake up one morning that all of your stuff has not been stolen and replaced by exact duplicates.

A clear conscience is usually the sign of a bad memory.

If you who believe in psycho kinesis, please raise my hand.

I almost had a psychic girlfriend but she walked out on me before we met.

Ok, if you are so smart; what's the speed of dark?

How do you tell when you're out of invisible ink?

If everything seems to be going well, you have obviously overlooked something.

As a number of ZH pieces have pointed out, Germany is itself, rather dishonestly deep into this dirty game and quite vulnerable. Germany has to pay and print and inflate, or else get hit by a runaway locomotive.

- Germany's 'wealth' is half-fake, from selling stuff to other European countries, which it in turn has financed, by Spanish etc. government bonds which are in turned held by Germany's banks and pension funds.

- If Germany won't play any more, (1) their banks go bust and (2) they must tell their workers that their pensions have half evaporated, and they too will have a street revolution like Greece.

It is cheaper and the path of least resistance for Germany, to do some loud complaining, and then submit, kicking and screaming, into the inflation - money printing - shared tax burdens, that will help cover up for the actually insolvent German banks and the insolvent pension funds holding mountains of European paper.

Even with scenarios like Greece leaving the euro, or the euro-zone splitting into two parts, the Germans still in the end have to recapitalise their banks and do something to mask the disaster in the pension fund holdings.

The least-resistance political path, as nearly always, is to tax, print and inflate, instead of liquidate.

This idea was killed in March 2011. I think it is dead now too. Anyway, here is a link to someone's analysis of the implication of Eurobonds, done back in January 2011: http://sibileau.com/martin/2011/01/28/

yeah when it comes to borrowing, it's a federal matter and Germany should be a good partner and get into more debt for the sake of the Union. When it comes to spending, Germany should butt out because of national sovereignty. National sovereignty with other peoples money. Another EU first.

Not really, as they never ruled on Eurobonds specifically, they ruled on the ESM (and that was just barely legal), although it was implied by the logic of that opinion that Eurobonds would be a non-starter.

Germany would in all likelihood need to change its Constitution to allow for Eurobonds. That will NEVER happen. The German electorate doesn't want to subsidise building bridges in Spain. Germany knows full well how irresponsible Southern Europe has been in its spending habits, why would they EVER agree to place themselves on the hook for said projects?

It should be noted that S&P has stated that if Eurobonds were a joint liability of the Eurozone, they would have the rating of the weakest link, Greece, which is CCC, or in other words, LOL.

There are some articles in the German constitution that are protected by an 'eternity clause'. So, they can't be changed at all. Furthermore, the Court of the Constitution has made it clear numerous times that the only institution that is respnsible for the federal budget is the Bundestag. In the past there were attempts to transfer more powers to Brussels but the Court always said "Nein! Dear MPs, you must not do that. It's your responsibility."

Sorry thats what the mainstream media here in the US would have you believe. There are plenty of skin heads in Germany, all they need is something to unit them. Look at France and LePen for an example, I am sure Germany is not far behind.... Right wing and Germany has a tendency to scare the world so its greatly downplayed.

All Sarkozy had to do is promise LePen a few choice cabinet posts and he would still be in power, after her indorsement, instead he got a "stay home" message...

Wrong on both counts. Its in the krauts best interest NOT to print money because they learned something after WW1 (Weimar) that the US didn't.

The US dollar has been falling for 10 years yet exports have been falling. The Euro has been rising for 10 years yet Germany's exports have been rising. Sure puts to rest that keynesian "weak currrency is good for exports " myth doesn't it ?

It is in their best interest to keep their banks afloat. It is in their best interest to protect their "exports".

Wrong on both counts.

Actually he is correct. Germany is shafting the workforce since more than two decades now, solely for the benefit of their export machinery. And via Greece and Spain bailouts, once more the German taxpayers will have to pay for all the products the international corporations can 'sell' to whoever receives German loans, for all the profits the international banks derived from burdening the PIGS with unrepayable debt.

You can print your own government created money interest/debt free and without issuing bonds. The control of monetary policy is a most sacred institution and belongs with the people not private central banks. We are sick and tired of the poverty, hunger, war and fraud that emanates from these private banking institutions. It is time we kicked the private central banking cartel to the curb and outlawed sovereign debt along with sovereign bonds.

The problem is that all the non-German countries incorrectly think that if they have Eurobonds, it means they will pay (low) German rates of interest for their borrowing. They are mistaken. All that will actually happen if Eurobonds are introduced is that Germany will end up paying more to borrow and nobody in their right mind is going to do the old 'Turkey voting for Christmas' routine.

It reminds me of how easily performance related pay was sold to the masses as being a good thing. Unfortunately, 90% of the employees think they are in the top 10% of the performers.... but then they get the sad awakening. Employers 1 : Employees 0 (after extra time).

Germany's cds is trading like they would be likely to take a hit from subsidizing the Euro zone. If they were not...why would cds widen to 100bps recently? To me the fact that is was trading around 60bps was the signal that none of that shit was serious...

The ECB is going to print so much money they'll make Bernanke look like a piker. Merkle will scream and kick but in the end she will not oppose it because the one thing that she will not allow is herself or Germany being put in a position where they can be blamed for destroying the euro.

sure, but eu and euro are still politically wanted. to be consequent, one also has to implement common fiscal instruments for a common currency. if you do not want this, you have to quit at least the euro. but meanwhile the tensions could now also lead to the end of the eu.

It was in the St*rs for Chelsea to win the 2012 Champions League... In the semi-final return leg they survived a second half down 10 men - to Barcelona - who was also awarded a penalty - that Messi missed... and survived 45 minutes of being stuck in their own end.

ANd against Bayern Munich they had several key players out and again had to come back from behind to win. They were also behind in the penaltys and Drogba sealed the deal.

2012 Year of the Dragon

Speaking of sports, i find in interesting that in the year of the Dragon their is a strong possibility that the NJ Devils will play the LA Kings. How is the Devils (who nobody really though about being a solid contender and the LA kings for that matter too)

The only reason why the US and UK is pushing for Eurobonds is their need to move all these newly printed and freely given out Dollars and Pounds into Europe, in order to receive hard Eurobonds in exchange. These Euro;bonds can then be offered to the ECB as colloteral for cash Euro currency. This currency is then going to be used to make payments for imports from the Eurozone.

The motto is: Print US Dollars and British Pounds and convert it into Euros which is still a hard curency.

The TBTF banks are very happy to convert their zero interest Dollar and Pound funds into interest bearing Eurobonds. Thus vast amounts of Dollars and Pounds given in exchange for Eurobonds would then rest in peace as reserve money in Europe or return to the US/Uk to be used to purchase Treaseries and Guilts. Thus inflation in US and UK is kept relative low (because the new printed money is leaving the country and therefore not adding immediately to the inland money in circulation)

The problem now, the souvereigns of South Europe do borrow much lesser nowadays because of austerity measures and high interest rates. Germany as one of the last countries with a good crediit rating has a balanced budget already, resulting in low interest rates . Plus the capital Germany needs to roll over its old debt is easily provided by German institutions like Allianz et al. To say no busines for the TBTF.

The solution: Eurobonds issued by Greece and all other countries having problems to borrow money. Issued by Greece and backed by Germany and the other countries of the Eurozone having still a good reputation.

The price of such a scheme: High inflation in Europe for the price of a not so high inflation in US/UK. The difference is: In us/Uk the saving rate is very low compared to the Eurozone, for example the Italian population hast vast savings, mostly Italian government bonds. So inflation in US/UK is welcome because it kills the debt, while in Europe it would kill the savings of the population, which is an important source of capital for the Eurozone economy.

So Eurobonds ar just a wet dream from a desperate Mr. Cameron. There is no way that such a thing happens in the Eurozone as it stands now. Once the fiscal union is completed (and this may happen quite soon) then Eurobonds can be an option. But then the Greek government does not have the authority to borrow money just as they want to. This is going to be decided then in Strasbourg I expect, by some kind of European Debt ministry. If the Greeks want to borrow because their budget is unbalanced then they have to ask for money there and it might happen, that Strasbourg says,, no sorry, maybe next years.

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